A NEW IDEA TO IMPROVE DC PLANS: THE RETIREMENT TIER

Overview

We believe that one of next areas of focus and innovation in the Defined Contribution (DC) industry should be the development of a “Retirement Tier,” and many plan sponsors have already made this discovery, perhaps without recognizing it.

DC plan sponsors, consultants and advisors ought to expand the common notion of the three-tiered investment menu (i.e. the "Do it For Me", "Do it With Me" and the "Do it Myself" approach) and start incorporating a Retirement Tier into their DC plans. Unlike the classic three-tier approach in DC plans, our view of a Retirement Tier is a more comprehensive set of complementary solutions that target participants nearing or in retirement.

The retirement Tier Complements the Other Tiers

Retirement Tier

Tools and Investments to appeal to all types of participants

A Retirement Tier includes carefully chosen investments, advice and tools that can help participants execute a strategy to fit their DC plan into the context of their overall household financial situation. It is a complement to the classic three-tiered investment menu, serving participants nearing or in retirement who identify with any of the three traditional investment tiers.

Tools and Advice

Targeted Communications

Investment Options

Plan Design Changes

Tools And Advice

Social Security Optimizer

Expense Assessment Tool

Resource Center (reverse mortgage, Medicare)

Targeted Communications

Catch-up contribution "second escalator"

Invite mid-career hires to save at higher rates

Invitation to use targeted tools

Investment Options

Laddered/Defined Maturity Bond Funds

Managed Payout Funds

Inflation Protection

Insurance Solutions

Plan Design Changes

Allow for partial ad-hoc withdrawals

Allow terminated participants to continue loan payments

Tools and Advice

DC plans are embracing the idea of financial wellness, with the introduction of engaging tools that help participants with financial challenges broader than just 401(k) investment decisions, such as how to pay down student loans. But most of these planning and education tools are geared toward younger participants. A Retirement Tier would further extend this concept to tools that are specifically useful for the group of participants nearing the end or already at the end of their careers, such as a Social Security Optimizer.

Targeted Communications

One idea for targeted communication plan sponsors could send to participants when they turn 62 is to educate them on the potential benefits of delaying Social Security. They could use the opportunity to introduce them to a Social Security Optimizer tool as well. We believe this would have a tremendously positive impact on how households then manage their 401(k) assets.

Investment Options

In the event that a participant in a DC plan, in the context of what’s best for their household, chooses to delay filing for Social Security they may need to figure out how to fund their retirement until they start receiving benefits.

An investment option designed to provide more cash flow predictability while still earning income would be a logical solution. A “laddered” series of defined maturity bond funds could allow the participant to “sequester” savings needed to meet household expenses, and provide the necessary income until Social Security begins. Other investment options that could be part of the Retirement Tier are managed payout funds, inflation protection funds and insurance based products such as guaranteed minimum withdrawal benefit (GMWB) contracts or qualified longevity annuity contracts (QLACs).

Plan Design Changes

Many plans have provisions that are either outdated or in conflict with what plan sponsors state as their goals for the plan. For example, 69% of plan sponsors agree that participants should leave their assets in the plan and allow them to be drawn down over time.1 However, only 13% of DC plans allow terminated participants to take ad-hoc, partial distributions from the plan.2

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Topic Paper

How can plan sponsors better meet the needs of participants approaching retirement? What's the next step? Read this topic paper that lays out the case for the inclusion of a Retirement Tier in DC plans.

Featured Funds

The Cerulli Report, “U.S. Retirement Markets 2014: Sizing Opportunities in Private and Public Retirement Plans,” Cerulli Associates. Only plan sponsors to plans with over $100 million in DC assets were surveyed.

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